Imagine that you are going to a war without planning how you will fight on a battlefield. Sounds like a very bad plan right? It is not recommended that you fight blindly while others have plans in slaughtering you. It is the same when you are trading.
There are lots of professional traders waiting to snitch off from your capital so they will be the ones that would gain huge profits. Never, ever, go on with day trading without doing your due diligence, your research, and establishing your sound and concrete trading plan. Also, it is good that you are taking your time in learning first the basics, how it could be applied, and how to execute them.
We have discussed in previous lectures that trading plans are a must if you will be day trading. It is like your overall armor and protection when you are going to war. It may seem that we are overreacting here but when you are handling the trades on your own, it will be more dramatic if you see yourself on the losing side.
To prevent that from happening, establish a strong trading plan. To build your own trading plans, you must answer the WHAT, WHEN, and HOW.
For the what, we have to clarify, what is our goal? What are the stocks we will be looking at? What sector do we think is moving at a fast phase during the current period? What are your risk levels? These are the questions that you will be asking yourselves when you are just starting. This sets your mind to be objective, and know what you will be strictly aiming for.
Before you enter a trade, establish the goals you want to accomplish. Set realistic profit targets and risk/reward ratios. For example, you chose the 2:1 risk/reward ratio. The analogy for this would be for every $1 loss per share, your goal would be to profit $2 on the next trade. This somehow offsets the loss you had previously and gets you the breakeven for your capital. Keep in mind that day traders have unique personalities, so what risk/reward ratio that one may establish, will not suit another one. So better to assess yourself, know how much risk you are willing to take, and how are you going to accomplish it.
Another thing is you could look for sectors, then narrow down your research on the stocks you would likely want to enter a trade with. By using stock screeners, you will be able to filter out the stocks that don’t fit your financial criteria, and you will be able to save time as you proceed in analyzing the generated results.
Another question you should be asking yourself would be the WHEN. When should you create the trading plan? When should you execute the buy and sell? When should you look at financial news?
For me, the best time you should be preparing your trading plan would be the night before, or the hour before the market opens. Or any time that you would want as long as your mind is calm and collected, just establish your trading plan while the market is close, not when it is raging. The chance of day traders
executing a wrong trade because the trading plans were done during the market is open is high, thus, prone to higher loss. It will be easier for you to plot out your entry and exit points when the market is calm, and you will be able to do your decisions when you’re calm too.
Get into the habit as well on checking in with your trusted financial websites which you could use as leverage for decisions. They are usually up to date and will give you news on what is happening on your favorite stocks, or the overall outlook of the country’s economy. Financial news could be dividend payouts, company expansions, joint ventures of several companies, the release of the annual reports, and appointment of the new board of directors, president, etc. These kinds of news would likely impact the price movement of the stocks, so make sure that you keep yourself up to date, and incorporate them in making your trading decisions.
And now that we are on the last question which is the HOW. How do you prepare your trading plan? How do you execute your entry and exit rules? How do you keep track of your trades? All of these should be considered if you want to improve your day trading skills. All must be kept on track.
There are many different ways that you could prepare your trading plan. One is to write it on paper, the other one would be to input it on an excel file. Or, you could use both. It all depends on how you will do it, and what you think will be more beneficial to you. Always remember that you need to create your trading plan, and not rely on others because what may be effective to them, may not be that effective to you.
Keep track of all your trades, and include the reasons as well because these records will be helpful once you consolidate them all. It will show you your strength when you were trading, and the weak points you had that you could do improvements. Write down all the necessary details since they will serve as the life-learned lessons that you could use in educating yourself.
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